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Amie Whittington

Health Care

Dual Status Hospitals: Beware of IRS Compliance Audits

Ignorance will not lead to bliss

Published: Wednesday, July 5, 2017 - 12:02

Is your governmental hospital exempt under Section 501(c)3? If you have a 403(b) plan, the answer is yes, but even if you don’t, you need to check.

The Internal Revenue Service (IRS) is ramping up compliance audits of governmental hospitals that are exempt under 501(c)3 (dual status). The circumstances leading up to now are important because the implications can be difficult to understand.

At the end of 2014, the IRS released the final regulations under Section 501(r) for charitable hospitals exempt under Section 501(c)3. These regulations are in response to requirements enacted under the Affordable Care Act and finalize regulations first proposed in June 2012 to hold tax-exempt hospitals to a higher standard.


The final regulations confirmed government hospitals previously recognized as exempt under 501(c)3 are subject to all of the 501(r) regulations. The IRS noted that these hospitals could request to voluntarily terminate their section 501(c)3 recognition in order to not be subject to the regulations.

Government hospitals that wanted to maintain dual status continued to not be required to file a Form 990. However, to retain 501(c)3 status, these hospitals had to still meet the 501(r) requirements that do not involve Form 990 disclosure, including making their community health needs assessments and financial assistance policies widely available on a website.

At the time regulations were issued, many wondered how the IRS would monitor that governmental hospitals with dual status were following these regulations, since there is no reporting requirement. The only way to monitor compliance with these regulations for dual status hospitals would be to come in and audit them. And, come on, how often does the IRS randomly audit a governmental hospital? Not very often—until now.

The IRS is definitely increased its auditing of dual status hospitals, but why? The IRS needs funding, and discovering noncompliance to regulations provides that—particularly in the community health needs assessment (CHNA) section of the regulations.

CHNAs were to be conducted every three years, starting in 2013, with the second CHNA due in 2016 (due dates depend on fiscal year end). An implementation strategy was also to be adopted, detailing how the hospital was going to address these community health needs. For each year that a CHNA is not in place, hospitals are subject to a $50,000 “excise tax.” If you’re dual status and have yet to conduct a CHNA, you could be subject to up to $250,000 of penalties.

So, what should you do? Is your governmental hospital dual status? If so, start now on conducting the CHNAs and verify you are in compliance with other policies that are required as part of these 501(r) regulations. Showing that you are working to correct the issue might not help you avoid all penalties, but you will be further ahead.


About The Author

Amie Whittington’s picture

Amie Whittington

Amie Whittington is a senior manager in HORNE LLP’s healthcare services practice. She primarily provides tax and consulting services to nonprofit and healthcare entities, including hospitals, doctor groups, and physicians.